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CBI Downgrades UK Growth Forecast

Posted by Brian on 17th December 2007 at 12:48 PM
CBI Downgrades UK Growth Forecast

The Confederation of British Industry (CBI) has downgraded its outlook for UK economic growth in 2008, amid credit uncertainty and surging energy costs.

The group thinks annual growth will hit 2% next year, down from 2.2% forecast in September. This marks the CBI's third consecutive downgrade for 2008.

Higher oil and food prices will push up inflation further next year, says the CBI, hitting around 2.6% by year end.

Nonetheless, the CBI believes talk of a full recession is exaggerated.

Ian McCafferty, the industry group's chief economic adviser, said: "Whilst the 2008 slowdown may appear dramatic set against this year's strong growth, the fundamentals of our economy remain sound and talk of a full-blown recession is overstated".

Tight conditions

But the CBI did underline that uncertainty around credit conditions would continue to impact both business and consumer confidence, and the degree to which the property markets would suffer remained unknown.

In particular the group stressed increased uncertainty about the size of sub-prime losses, causing a reluctance among banks to lend before closing their books for the year.

The credit squeeze over the summer was prompted by a US housing slowdown that triggered a surge in mortgage defaults, notably related to sub-prime loans - those made to borrowers with no or little credit histories.

The group said borrowing conditions were already tighter for some households and firms.

Such uncertainty is having an impact on UK consumer spending, which the CBI thinks will slow down more than previously forecast. Growth is set to fall from 3.1% this year to 1.9% in 2008, it said.

Investment growth is tipped to slow sharply in 2008 at 1.8%, from 5.7% in 2007, stemming partly from lower property related investment. But other sectors are set to see better investment levels, says the CBI.

"Finance and construction will be hardest hit," predicts the CBI.

On the plus side, real household incomes are expected to rise modestly next year.

And the pound is expected to weaken, acting as a spur to exporters as UK goods become relatively cheaper.

'Challenging year'

In a bid to keep inflation in check, the group predicts a further cut in interest rates in 2008 after recently cutting them to 5.5% from 5.75%.

Central banks in the US and UK have been cutting rates in an attempt to boost their economies by making it cheaper to borrow money.

But at the same time there has also been the wider trend of rising inflation.

The CBI emphasised this double threat of how to tackle rising prices for oil as well as gas and food, while also addressing a slowing economy.

"A prolonged period of high oil prices will add to inflationary pressures, whilst putting a squeeze on profits and discretionary spending, compounding the slowdown".

These factors mean it would be an "incredibly challenging year" for the Bank of England.

Source: BBC News

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